Reeling In New Customers: The Tempting Bait That Is Low-Cost Cloud Storage

The pitches are seductive. Free cloud storage for 10 GB per month, or 15 GB, or 50 GB. Cloud storage for less than 3 cents per GB, per month. Long-term cloud storage for 1 cent per GB, per month.

However, when it comes to taking advantage of that low-cost cloud storage, it pays to carefully read the fine print. A cloud storage service that offers free or near-free capacity can end up costing much more than expected when the cost of services such as computing, replicating, or even accessing a company's own data are included.

Welcome to the world of low-cost cloud storage, where finding the real cost of the service is about as much fun as understanding cable TV, phone and Internet bundle pricing.

Storage At Better-Than-Commodity Pricing

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Storage traditionally has been an expensive part of the data center infrastructure. Expensive, though, is relative, as the cost to purchase storage capacity continues to fall even as the cost of managing all that capacity rises.

Because the cost of managing storage rises with the amount of capacity managed, businesses may be attracted to the limitless capacity of cloud storage priced as a service, which includes monitoring and management, all with a minimal -- or no -- initial capital expense.

[Related: Getting On The Cloud: 12 Cloud Storage Gateways]

The Glacier archival storage offering from Amazon Web Services, for instance, seems like a real bargain. It costs only 1 cent per GB, per month to store data using Glacier, with no charge to move that data to the cloud.

However, deleting that data within 90 days will cost 3 cents per GB. Want to transfer data to the Internet from Glacier? Be prepared to spend 5 cents to 12 cents per GB.

Cloud storage for consumers and small businesses is already, in some cases, priced below zero, said Greg Schulz, founder and senior adviser at StorageIO, a Stillwater, Minn.-based research firm.

"You can get 10 gigabytes free if you sign up for other services from some services providers," Schulz told CRN. "Or you can get a gift card for signing up for cloud storage."

On the business side, prices for cloud storage can be close to zero, Schulz said. However, what customers pay depends on several factors including the performance, reliability and availability of the storage cloud. "It's like booking a flight," he said. "If you want an extra soda or an extra pillow, or to rebook the flight, airlines charge for it.

However, it's not a case where cloud service providers are hiding anything, Schulz said. "The prices and policies are all published," he said. "But you have to sift through everything, maybe use a spreadsheet to look at the differences."

Next: Cloud Storage And Public Cloud Providers

The true cost of cloud storage is usually two to 10 times the initial rate, which for Amazon Glacier starts at 1 cent per GB, said Mike Davis, vice president of technology at Broadleaf Services, a Billerica, Mass.-based solution provider that usually partners with Amazon but also works with SunGard, Windstream Communications and Internap for customers with regulatory requirements.

But that is only part of the equation, Davis said. "Cloud providers may be giving away the storage, but they're also charging for GPU, CPU and memory usage," he said. "Those costs are not falling near as fast as storage costs."

Davis said to not forget to factor in services around data stored in a cloud, including hosting, networking, load balancing, workspaces, firewalls, DNS, and a variety database and analytics offerings. "They are all extra costs," he said. "We've experienced customers being really surprised when they see the services. These are the hidden costs of going to public clouds."

As for Amazon Glacier in particular, customers had better be prepared for how much they will pay beyond the initial cost to store the data, Davis said.

"One of our customers is a big advertising company," he said. "What if their Fortune 500 client says, 'Do you remember that project? Can you make a few changes for us?' If it's on Glacier, it can't be brought out quickly or cheaply. Tier-four solutions like Glacier are really insurance against disaster, and God help me if I need it."

Cloud Storage And Public Cloud Providers

Providers of public cloud services told CRN that the falling cost of cloud storage is more a function of increased efficiencies and less a case of specifically using price changes to attract more business.

Tom Szkutak, CFO of Amazon, said during the company's second-quarter financial analyst conference call in July that Amazon Web Services has had "very substantial price reductions for customers starting in [the] second quarter" ranging from 28 percent to 51 percent, depending on the service.

While Amazon, Seattle, declined to discuss its pricing strategy with CRN, a source close to the company said Amazon has dropped AWS prices on 45 separate occasions since it was started in 2006, including six times this year alone.

For Amazon, price drops are a part of the "Bezos Flywheel," which is named after Amazon Founder Jeff Bezos and states in part that as Amazon achieves efficiencies in its own infrastructure, it can pass the savings on to customers who will purchase more infrastructure services from Amazon, which leads to greater efficiencies, the source said. However, the source said, while storage is a high-volume, low-margin business, the AWS price will not likely reach free.

Hewlett-Packard, which provides public cloud services via the HP Cloud and more recently its new Helion service, sees Amazon and Google as engaged in a price war to see who can drop prices fastest, said Bobby Patrick, CMO of HP Cloud.

Next: Channel Challenges And Opportunities Of Low-Cost Cloud Storage

Unlike Amazon and Google's public-cloud-only focus, Palo Alto, Calif.-based HP offers technology for both private and public clouds, as well as for traditional on-premise storage, Patrick told CRN. Ttraditional on-premise storage is primarily used for structured data, private clouds are best for largely unstructured data, and the public cloud is best for applications requiring bursts of capacity, he said.

Patrick said he doesn't expect the cost of cloud storage to reach zero. "Cloud storage providers' business models have to find some way to make money," he said. "At some point, offering storage infrastructure for free will impact margins and stability. But the trends are favorable for the CIO."

A Microsoft spokesperson, responding to CRN via email, wrote that it is hard to argue that a cloud provider could be successful without a cost-competitive storage offering. "It's easy to argue that with a cost-competitive storage offering the door is open to offer higher-value services," the spokesperson wrote.

Microsoft, Redmond, Wash., declined to say whether its cloud storage business is profitable, but the spokesperson wrote that more than 57 percent of the Fortune 500 now use Microsoft Azure, where more than 30 trillion storage objects currently reside.

The spokesperson also declined to discuss how much money Microsoft makes on services tied to its Azure storage cloud, but wrote that such customers have access to hundreds of related services including compute, networking, Web, mobile, analytics, storage and backup, content delivery networking, and identity and access management.

Channel Challenges And Opportunities Of Low-Cost Cloud Storage

Helping customers gain access to cloud storage is a way solution providers can take advantage of all that relatively low-cost capacity, Schulz said. But that should not be an end in itself.

"When people start to realize there's more to a cloud than 'cheaper,' that will be a big 'Aha!' moment," he said. "VARs can't look at just the cheapest cost, unless they want to be another lowest-cost provider. If they want to add value, they need to look at how to leverage the cloud in new and interesting ways."

For solution providers looking at value-added services as a primary part of their business, low-cost cloud storage is not a priority. However, there are many ways to take advantage of it to build on other services.

River Point Technology is looking to move upstream with customers by focusing on such areas as data analytics, and so cloud storage is not a priority, said Jeff Eiben, executive vice president of business development at the Pittsburgh-based solution provider.

"By itself, there's a limit to our market unless we do something like use it for disaster recovery," Eiben told CRN.

As a Microsoft partner and a partner to its StorSimple offering even before Microsoft acquired StorSimple in the fall of 2012, River Point Technology is discovering that cloud storage is a way to find new customers, Eiben said.

"Don't get me wrong," he said. "Microsoft uses the technology to bring us new opportunities. We may not make a lot of money on the service. But it opens the door to opportunities we might not have had before. We had a lot of domain knowledge with StorSimple that Microsoft didn't, and so they brought us into opportunities."

Next: Opening The Cloud Services Door

River Point Technology uses StorSimple for data retention and archiving, which allows the solution provider to have further conversations with customers about application migrations or SQL, Eiben said.

"Cloud services tend to be sticky," he said. "Once you have a foot in the door, you see more areas to talk with customers about."

River Point Technology also is a direct partner with Amazon, and works with Pax8, a Lone Tree, Colo.-based distributor of other cloud services that build on Amazon.

Eiben said that Amazon is definitely leading the cloud storage price drop, which in turn helps accelerate the adoption of other cloud services. "But it's not really a show-stopper," he said. "No one takes a price drop as a trigger to do more services. Pricing is not really a driver. I haven't seen it."

The downward price pressures of generic cloud storage are an opportunity to better serve SMB customers who need predictability more than anything else, said Mike Leo, director of product development FiberCloud, a Seattle-based managed service provider and cloud service provider.

There are a lot of providers throwing out terabytes of storage or dropping their price, Leo told CRN. "But it's different for SMBs," he said. "We provide a healthy layer of administrative control to give easy management to SMB employees. Microsoft's OneDrive may be free, but if users want that management, then it's no longer free. We tell customers they are not paying only for storage, but also for the management."

As a service provider, FiberCloud can take advantage of falling cloud storage costs by bringing storage customers a wide range of other cloud-based services, Leo said.

"When FiberCloud started offering cloud-based services in 2009, we saw a lot of early adoption of our cloud backup services," he said. "It was the easiest service for new customers to understand how the cloud could help them. With broader adoption of cloud storage now, I see it as another opportunity or the next wave to get customers more interested and accepting of the cloud.

The falling price of cloud storage can sometimes be a problem as it often gets customers focused on price alone, said Jamie Shepard, regional and health systems senior vice president at Lumenate, a Dallas-based solution provider that partners with EMC and Amazon on cloud storage.

"When a customer asks for the cost per terabyte of cloud storage, I say, 'For what purpose? What's the workload you want to move to the cloud?'" Shepard told CRN. "For a lot of workloads, EMC storage is a much stronger solution. But the focus on the cost-per-terabyte is what happens when customers listen to the cloud providers."

For many workloads, storage clouds are not the most efficient offerings, Shepard said. Even so, the falling cost of cloud storage helps with customer conversations, he said.

"We chart their applications, their workloads, the efficiencies of moving workloads in and out of the cloud, and the cost," he said. "Some workloads are good for the cloud and are cost-efficient there. Others may work well on the cloud, but are not cost-efficient."

This article originally appeared as an exclusive on the CRN Tech News App for iOS and Windows 8.